For a mortgage lender that makes mortgage loans to borrowers,which one of the following would be an example of adverse selection?

A) After the loan has been made,individuals become careless with their finances
B) Individuals most likely to default are the ones most likely to apply for the loan
C) Borrowers investing their loan proceeds differently than the bank requires
D) None of the above

Question

​For a mortgage lender that makes mortgage loans to borrowers,which one of the following would be an example of adverse selection?A) ​After the loan has been made,individuals become careless with their financesB) Individuals most likely to default are the ones most likely to apply for the loanC) Borrowers investing their loan proceeds differently than the bank requiresD) ​None of the above

Basit Junaid · Accepted Answer

Final Answer : B, Explanation :  Adverse selection refers to the tendency of higher-risk borrowers to be more likely to apply for a loan, which can lead to higher levels of default and losses for the lender. Option B represents this scenario, as individuals most likely to default are more likely to apply for the loan, leading to potential adverse selection for the lender. The other options do not represent adverse selection.

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